Court of Appeals Rejects Fraudulent Inducement To Enter Into Employment Tort

Today, the Court of Appeals rejected an exception, or way around, New York’s at-will employment principles by dismissing a so called fraudulent inducement to enter into employment cause of action – Smalley v Dreyfus Corp., 2008 NY Slip Op 01252.

In the case before the Court, plaintiff Gerald Thunelius, was a director of Dreyfus’ Taxable Fixed Income Group (TFIG). He heard a rumor that Mellon Financial Corporation, Dreyfus’ parent corporation, made an offer to acquire the fund management company of Standish Ayer & Woods. When asked, Dreyfus’ chief executive officer (CEO) told Thunelius that no merger had occurred or was being considered. Relying on those assurances, plaintiff Martin Fetherston in December 2002 accepted employment in the TFIG. Mellon acquired Standish in March 2001. Between 2001 and 2004, Thunelius repeatedly asked Dreyfus’ officers whether there were plans to merge the TFIG with Standish, and they denied any planned merger. During these years, plaintiffs Kenneth Smalley, Darlene Haut and Michael Allen allege that they accepted jobs with the TFIG in reliance on the denials by Dreyfus’ officers. The plaintiffs conceded that they were at-will employees

It was further alleged that in April 2004, Dreyfus’ CEO told the TFIG that any merger of the group into Standish was “off the table,” and that the group would remain intact for at least another year. By early fall 2004, merger rumors resurfaced, which at the time Dreyfus’ officers refused to confirm or deny. In late 2004, the two groups merged, and in February 2005 — four years after the alleged merger discussions began — Dreyfus fired every member of the TFIG.

The five sued Dreyfus and others, asserting several causes of action, including one for fraudulent inducement. The Supreme Court dismissed the entire complaint noting that at-will employees cannot reasonably rely upon their employers’ promises of continued employment, and that these employees failed to allege injuries apart from their termination. The Appellate Division, four-one, modified Supreme Court’s order by reinstating the fraudulent inducement claim, concluding that Dreyfus misrepresented a present material fact and that the plaintiffs alleged injuries distinct from termination.

However, the Court of Appeals reversed the Appellate Division and dismissed the fraudulent inducement cause of action.

Most employment in New York is “at-will” meaning that either the employer or the employee generally may terminate the at-will employment for any reason, or for no reason. And the Court of Appeals stated that New York law is clear that absent a constitutionally impermissible purpose, a statutory proscription, or an express limitation in an individual contract of employment, an employer’s right at any time to terminate an employment at will remains unimpaired (quote and citation omitted). The Court also noted that it had repeatedly refused to recognize exceptions to, or pathways around, these principles.

The Court then stated that the core of plaintiffs’ claim was that they reasonably relied on no-merger promises in accepting and continuing employment with Dreyfus, and in eschewing other job opportunities. Thus, the plaintiffs alleged no injury separate and distinct from termination of their at-will employment. The Court stated:

In that the length of employment is not a material term of at-will employment, a party cannot be injured merely by the termination of the contract — neither party can be said to have reasonably relied upon the other’s promise not to terminate the contract. Absent injury independent of termination, plaintiffs cannot recover damages for what is at bottom an alleged breach of contract in the guise of a tort.

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